Q2 2019

News, Views & Stats

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The FX Report: Q2 2019 Need To Know � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � 1

FX Options � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � 3

Uncleared Margin Rules � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � 5

FX Futures � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � 7

FX Link � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � 8

CME Group is now home to EBS - for cash market execution, from spot to forwards to NDFs, and Traiana - for seamless FX connectivity.

Trade | Optimize | Analyze – The Full FX Trade Lifecycle

We’ve expanded our FX futures offering With quarterly expiries across every contract, and monthly expiries on six pairs, and now, with CME FX Link which connects the OTC FX market with FX futures electronically, for the first time.

We’ve expanded our listed FX options offering With Friday and Wednesday Weeklies, we are now the largest centralized all-to-all electronic FX options marketplace in the world.

We’ve expanded our OTC FX clearing offering With all FX Futures and Options, and all OTC Cleared FX Products, under one guaranty fund - that houses all of CME’s listed products.

That’s why:We’re working to deliver creative solutions to your most important challenges, so you can access the capital and margin efficiencies of our centrally-cleared and transparent market.

LaunchedMPI Reduction in GBP/USD Non-Consecutive Monthly Calendar Spreads: From 1 to �5 – In response to client feedback, we have reduced the minimum price increment (MPI) in GBP/USD calendar spreads, along with a change to the match algorithm, to 20% FIFO and 80% Pro Rata - with no levelling and all residuals being distributed via FIFO, to enable more granular price discovery

Shift to 10 a�m� New York expiration time: All FX Options now expire at 10 a.m. NY – to bring our markets in line with OTC convention

Strike listing change: New quarterly strikes are available in CAD/USD, AUD/USD, EUR/USD and JPY/USD – to provide traders with more choice and more ability to optimize strategies

Stay up to date: Subscribe to The FX Report Follow the performance of all our FX products by subscribing to The FX Report for all the news, views and stats happening in our marketplace.

Monthly, Quarterly, in print and online. Direct to your mailbox. cmegroup.com/fxtrending

LaunchingMPI Reduction in EUR/USD & JPY/USD Non-Consecutive Monthly Calendar Spreads: From �5 to �2 – In response to more client feedback, there will be a reduction in the minimum price increment (MPI) in both EUR/USD & JPY/USD calendar spreads, along with a change to the match algorithm. The new match algorithm will be 80% Pro Rata, 20% FIFO split.

Announced: July 11 2019 New Release: July 15 2019 Live: August 12 2019 (ahead of September Quarterly Roll) Visit cmegroup.com/mpi for more information

Implied Functionality: This functionality will be removed as it is no longer necessary to support the liquidity in the outrights and spreads.

Need To Know: In Our Markets

2

GBP/USD Non-Consecutive Monthly Calendar Spreads Minimum Price Increment (MPI) Reduction: More volume, better managed

29% increase in GBP ADV vs. last four rolls – over the full two week roll window. June roll ADV across other major pairs was in aggregate up just 4%.

145,000+ contracts top of book (TOB), during RTH at .5 MPI (~15x TOB coverage of 9,999 max order quantity). TOB during peak roll days – Wed/Thur avg. ~250k TOB at .5)

38% of Open Interest transfer was completed by Tuesday of the roll week and more than 95% ADV during the week prior to the roll – all ahead of the typical pace.

14% went to delivery, compared to 29% on average – showing above average Open Interest transfer prior to expiration.

62% increase in non-member ADV – a measure of end-user activity in our market – comparatively, in other majors, non-member roll ADV was on average up 11%.

50% reduction in spread costs for all trade sizes based on average TOB levels.

Source: Data collated for summary of June 2019 GBP roll with reduced MPI

FX Futures: In The News

3

Today, 37% of FX Options volume is executed electronically

In the wake of MiFID II, the use of TCA across all desks is increasing

The result, 40% of all surveyed are identifying listed FX Options as a potential solution

The TCA analysis, revealed substantial potential savings

Finally, when the Listed Options TCA is combined with funding and capital cost savings which can be accrued through netting

However, this is double the volume from only five years ago. In terms of where the market will execute more on screen, 70% of survey respondents stated that they saw value in the all-to-all model for FX Options – of which CME Group provides the largest in the world.

Along with a need to demonstrate transparent pricing and best execution – which has remained a challenge in the bilateral FX Options market. This, coupled with incoming UMR regulations, is causing dealers, FXPBs and buyside firms to consider costs, compliance, counterparties and future sources of liquidity with more urgency.

And tool to help solve these challenges – especially as listed options are being updated and adapted to better align with OTC market conventions – and market participants should recognize them as an untapped source of new liquidity.

for buyside participants, ranging from $2,000 to $7,000 per trade of $50 million notional.

the research shows savings up of to 70% per trade, for market participants with average trade sizes of $50 million and under on the CLOB.

Greenwich Associates Publishes New Total Cost Analysis (TCA) Study: FX Options in the Age of Uncleared Margin RulesIn June 2019, Greenwich Associates published a paper which states that buyside firms could achieve significant savings on execution costs, up to 70% on some trades, by shifting some of their trading to listed FX options. In addition, for those impacted by uncleared margin rules (UMR), funding costs could potentially be reduced by 86%.

Crucially, their total cost analysis (TCA) research also shows that listed FX options can be more cost-efficient alternatives to bilateral trading, independent of the incoming regulations, as the electronification of FX options accelerates and liquidity responds.

In Brief

FX Options: In The News

To read the full report, and to understand the methodology, visit cmegroup.com/fxotca

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Spot Light: Options AnalyticsA view into market positioning and visibility of pricing across the curve for better risk management. Example CAD/USD: The QuikStrike Heat Map & Vol2Vol tools

Open interest in the CAD/USD options shows a strong bias towards downside risk positioning for the nearest 14 days and the sharp rise in the CAD Put vol skew over the prior week, helping clients to adjust strategies accordingly.

FX Options: In Our Markets

CME Group operates the largest all-to-all electronic FX Options marketplace in the world. We’re actively aligning our FX Options marketplace to OTC market conventions, to enable more participants to benefit from our liquidity and the capital efficiencies available in our market.

Built from The Floor up – Made for the Electronic Market • All CME FX options expire at 10 a�m� NY – made for the most widely traded FX options expiration time

in the world

• $8 billion in daily liquidity*, made for all participants, totalling ~25% of all single-dealer and multi-dealer electronic volume globally

• 24 options pairs, flexible Wednesday, Friday and Monthly maturities, traded around the clock, made for macro event risk management

• New “quarter” strikes for more choice in deltas and premiums, live since March, already comprising ~22% of total volume, made for more granular execution

• Our auto-exercise process – which means all you have to do is focus on the fix, your position, and your hedge. No need to call counterparties and wait for their decision. It’s automatic, it’s efficient and it’s final. Made for simplicity and certainty.

*Average Daily Volume, averaged over a three year period

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Uncleared Margin Rules: In The News

Get Ready: Further Initial Margin Requirements May Impact your Costs The Uncleared Margin Rules (UMR) began being phased in from September of 2016 and require impacted firms to post 2-way initial margin against their non-cleared derivatives trades which is calculated using an approved model such as the ISDA SIMM. Whether and when a given entity is impacted directly by UMR is dictated by the Average Aggregate Notional Amount (AANA) calculation. The details of the AANA calculation differs by region, but is based on the total open gross notional value of all non-centrally cleared derivatives during a designated observation period.

To date it has primarily been large dealers directly impacted by UMR, but phases 4, 5 and 6 between September 2019-2021* will have a broader impact across the derivatives ecosystem including many regional banks, asset managers and hedge funds.

Threasholds by Country and Currency

UMR Phase US (in USD), EU (in EUR) Initial Margin Compliance Date

Phase 4 750 billion  1-Sep-19

Phase 5 50 billion 1-Sep-20

Phase 6 8 billion 1-Sep-21

Understand which products are included within the AANA calculation:

Included: Uncleared OTC Derivatives Not Included: Cleared Instruments

FX options

Non-deliverable forwards (NDFs)

Physical FX forwards

Swaptions

Hedging trades

Centrally cleared OTC swaps

Exchange-traded derivatives

This is not an exclusive list. For a detailed list, visit ISDA.

*Dates and/or thresholds may be extended and/or may change

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Uncleared Margin Rules: In Our Markets

Understand your options – and the full trade lifecycle solutions at CME Group CME Group offers the broadest set of global solutions to help you overcome challenges throughout the entire UMR process. These solutions can assist you in meeting UMR requirements, gain capital efficiencies, as well as minimize costs and core business disruptions.

Our solutions include ways to:

• Reduce notional – to assist with the AANA calculation

• Calculate, communicate and reconcile margin – to assist with the UMR requirements

• Reduce margin – to optimise the funding and cost implications of UMR

Case Study: FX Options The example below illustrates the IM requirements of a real portfolio of FX options across 4 different scenarios. The impacts of firstly netting and then also the model differences between non-cleared (ISDA SIMM) and cleared (CME) help to generate material IM efficiencies. Furthermore, ISDA SIMM does not allow the inclusion of FX FWDs and as such the typical delta hedges to FX Options are excluded from the IM requirements in the bilateral environment. Within clearing (both OTC cleared and Exchange Traded Derivatives) the delta hedges can be included alongside the FX Options in the margin calculation, and as such even higher levels of IM efficiencies can be generated.

Client

EB 1

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FX PB

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Client CME

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Scenario 1: Client trades FXO bilaterally and holds trades against each executing dealer.

Scenario 2: Client trades FXO bilaterally and then intermediates those trades with their FXPB.

Scenario 3: Client trades FXO bilaterally and then clears those trades to CME via their FCM.

Scenario 4: Client trades listed FXO.

Initial Margin Requirement using ISDA SIMM = $74,431,236

Initial Margin Requirement using ISDA SIMM = $22,806,242

69% Efficiency via netting

84% Efficiency via OTC Clearing

Initial Margin Requirement = $11,638,224

Initial Margin Requirement = $7,986,952

89% Efficiency via Listed FX Options

To understand UMR more fully – and the available solutions at CME Group, visit cmegroup.com/umr

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One to Watch: RUB/USD More participants are active in RUB/USD: Over 39k traded on June 13, equivalent to $1.5B notional.

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Russian Ruble Futures - ADV and Open Interest

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Ones to Watch: INR/USD, USD/CNH, SEK/USD & NOK/USDLiquidity increasing, lower execution costs available through our capital and margin efficient model.

EMFX, Efficiencies

Margin offsets across FX and across commodities

AUD BRL CAD CNH INR JPY MXN NZD RUB ZAR Brent Crude Oil

WTI Crude Oil

Gold Copper

BRL 30% – – – 25% – 30% – 20% 35% – – – –

CLP – 50% – – – – 45% – – – – – – 30%

CNH 45% – – – 30% 45% – – – – – – 40% 50%

INR 35% 25% – 30% – – – – – 25% – – 20% –

KRW 45% – 30% – – 25% – 44% – – – – – 30%

MXN – 30% 30% – – – – – 20% 30% 30% 30% – –

RUB 20% 20% – – – – 20% – – 20% 25% 25% – –

ZAR 20% 35% 26% – 25% – 30% 30% 20% – – – 30% –

FX Futures: In Our Markets

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Record Volume: Over $3Bn in notional traded on June 20 More participants utilised FX Link than ever before – as a source of liquidity and a means to manage market risk in a capital efficient way. Volume reached a record 33,199 contracts traded with a notional of +$3.2B on June 20.

Q2 volume averages 16,000 contracts from a diverse user base including banks, prop trading firms and buy side firms. All pairs active. All pairs have a competitive top-of-book. Its time to take another look.

TRADE: ON CME DIRECT | ANALYZE: VIA REFINITIV | EMPHASIZE: TO BLOOMBERG | VISIT: cmegroup.com/fxlink

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FX LINK20-Day Rolling Avg. Notional $M

FX Link Monthly ADV Since Launch

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FX Link: In The News

Source: CME Group

Source: CME Group

Helping the World Advance: CME Group is comprised of four designated contract markets (DCMs), the Chicago Mercantile Exchange Inc (“CME”), the Chicago Board of Trade, Inc. (“CBOT”), the New York Mercantile Exchange, Inc. (“NYMEX”), and the Commodity Exchange, Inc. (“COMEX”). The Clearing Division of CME is a derivatives clearing organization (“DCO”) for CME Group’s DCMs.

Exchange traded derivatives and cleared over-the-counter (“OTC”) derivatives are not suitable for all investors and involve the risk of loss. Exchange traded and OTC derivatives are leveraged instruments and because only a percentage of a contract’s value is required to trade, it is possible to lose more than the amount of money initially deposited. This communication does not (within the meaning of any applicable legislation) constitute a Prospectus or a public offering of securities; nor is it a recommendation to buy, sell or retain any specific investment or service.

The content in this communication has been compiled by CME Group for general purposes only and is not intended to provide, and should not be construed as, advice. Although every attempt has been made to ensure the accuracy of the information within this communication as of the date of publication, CME Group assumes no responsibility for any errors or omissions and will not update it. Additionally, all examples and information in this communication are used for explanation purposes only and should not be considered investment advice or the results of actual market experience. All matters pertaining to rules and specifications herein are made subject to and superseded by official CME, CBOT, NYMEX and COMEX rulebooks. Current rules should be consulted in all cases including matters relevant to contract specifications.

CME Group does not represent that any material or information contained in this communication is appropriate for use or permitted in any jurisdiction or country where such use or distribution would be contrary to any applicable law or regulation. In any jurisdiction where CME Group is not authorized to do business or where such distribution would be contrary to the local laws and regulations, this communication has not been reviewed or approved by any regulatory authority and access shall be at the liability of the user.

In France, each of CME, CBOT, NYMEX and COMEX have been recognized by the French Minister of Economy under Article D. 423-1 of the French Monetary and Financial Code.

In Germany, each of CME, CBOT, NYMEX and COMEX have been authorized under section 102 of the German Securities Trading Act (Wertpapierhandelsgesetz). The Commission implementing decision (EU) 2017/2320 of 13 December 2017 on the equivalence of the legal and supervisory framework of the United States of America for national securities exchanges and alternative trading systems in accordance with Directive 2014/65/EU of the European Parliament and of the Council replaced authorization under EU member state laws.

In the Netherlands, CME, CBOT, NYMEX and COMEX are dispensed from the requirement to obtain exchange recognition.

In Switzerland, CME, CBOT, NYMEX and COMEX are authorised foreign exchanges.

In the Dubai International Financial Centre, CME, CBOT, NYMEX and COMEX are each registered as a “Recognized Body” by the Dubai Financial Services Authority.

In the United Kingdom, CME, CBOT, NYMEX and COMEX are Recognised Overseas Investment Exchanges.

CME Group, the Globe Logo, CME, Globex, E-Mini, CME Direct, CME DataMine and Chicago Mercantile Exchange are trademarks of Chicago Mercantile Exchange Inc. CBOT and the Chicago Board of Trade are trademarks of the Board of Trade of the City of Chicago, Inc. NYMEX and ClearPort are trademarks of New York Mercantile Exchange, Inc. COMEX is a trademark of Commodity Exchange, Inc.

Copyright © 2019 CME Group Inc. All rights reserved.

Mailing Address: 20 South Wacker Drive, Chicago, Illinois 60606 PM2407/0719

For more information, please contact: Paul Houston Head of FX, London Office paul.houston@cmegroup.com +44 203 379 3355

Matt Gierke London Office matthew.gierke@cmegroup.com +44 20 3379 3546

Divay Malhotra London Office divay.malhotra@cmegroup.com +44 20 3379 3796

Ravi Pandit Singapore Office ravi.pandit@cmegroup.com +65 6593 5562

Craig LeVeille Chicago Office craig.leveille@cmegroup.com +1 312 454 5301

Graham McDannel Chicago Office graham.mcdannel@cmegroup.com +1 312 454 5209

Kevin McMillin Chicago Office kevin.mcmillin@cmegroup.com +1 312 930 8264

cmegroup.com/fx

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